Wednesday, 27 July 2016

EU may fine Spain, Portugal for deficits, give more time to cut them

In World Economy News 27/07/2016

The European Commission is likely to propose on Wednesday to fine Spain and Portugal for not effectively cutting their budget deficits and to give them new, longer deadlines to reduce their shortfalls to EU limits.
If the Commission decides to propose the fines, it would be the first time it does since the creation of EU budget rules 20 years ago. No country so far has ever been fined, even though some have broken EU budget rules repeatedly, such as France.
“The college (of Commissioners) will return tomorrow to the fiscal situation of Spain and Portugal,” Commission spokesman Margaritis Schinas told a regular news briefing on Tuesday.
“It will consider tomorrow steps that have become necessary following the Council decision that neither country has taken effective action to correct their excessive deficit,” he said.
Under EU rules, governments cannot run budget deficits higher than 3 percent of gross domestic product, a legal safeguard to ensure that excessive government borrowing does not undermine the common euro currency.
If the gap goes above 3 percent, the Commission and EU ministers set a deadline for its reduction. If a government fails to take steps to meet the deadline, it can be fined.
Portugal was to cut its deficit below 3 percent last year, but the gap turned out to be 4.4 percent. Spain was to cut the deficit below 3 percent this year, but is likely to remain above 3 percent also next year, according to Commission forecasts.
Because a council of EU finance ministers said on July 12 that Madrid and Lisbon had failed in the requested deficit steps, the Commission must now, under the rules, propose a fine for each country equal to 0.2 percent of their respective GDPs.
This would mean around 2.16 billion euros for Spain and around 358 million for Portugal.
But the rules also give the Commission the possibility of reducing the fine or cancelling it altogether, depending on the circumstances. Both countries have sent the EU executive arm letters with arguments why it should be lenient.
“This is very tricky. I don’t believe there will be a full fine. The only thing that is clear on fines is that it is not going to be 0.2 percent because of mitigating factors – this part is very fluid,” one EU official said.
Some in the Commission argue the fines should be cancelled altogether while others push for a reduction to 0.1 percent of GDP or even less, to a symbolic 0.02 percent of GDP.
The issue is politically highly sensitive. Spain has been without a proper government since the inconclusive elections in December 2015 and can therefore argue it was and is unable to quickly implement spending cuts.
Moreover, there is rising anti-EU sentiment across Europe and heavy-handedness from Brussels on budget rules, at a time when many economists call for more spending to stimulate economic growth. A dispute could fuel this further.
On the other side of the argument is the need to uphold EU budget rules, called the Stability and Growth Pact, which underpin the euro to prevent another sovereign debt crisis.
The credibility of the rules, which were sharpened during the crisis to discourage governments from over-spending, has already been badly damaged by the Commission’s decision last year not to fine France for its repeated abuse of the Pact.
Apart from the issue of fines, the Commission is likely to propose on Wednesday to give Spain two more years – until the end of 2018 – to bring the deficit below 3 percent. Portugal is likely to get only one extra year, until the end of 2016.
To exert even more pressure on governments breaking the rules, EU ministers can partially freeze the flow of structural funds to both countries until they are satisfied the two nations are taking effective action to cut their deficits.
Structural funds are money that less wealthy member countries receive from the EU budget for various projects, ranging from infrastructure development to fighting youth unemployment.
A discussion on a partial freeze of funds that would normally go to Spain and Portugal in 2017 will take place in September, after the European Parliament – which has to be consulted – returns from its summer break.
It is not clear yet how much of the funds could be suspended. However, the money can be unfrozen quickly once, for example, the two countries adopt 2017 budgets that show they intend to meet their commitments under EU rules.

Source: Reuters (By Jan Strupczewski, Editing by Tom Heneghan)